Abstract

http://ssrn.com/abstract=143148
 
 

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How Much Are Differences in Managerial Ability Worth?


Rachel M. Hayes


University of Utah - David Eccles School of Business

Scott Schaefer


University of Utah - Department of Finance


Journal of Accounting and Economics, Vol. 27, Iss. 2, April 1999

Abstract:     
This paper attempts to measure how much differences in managerial ability can affect firms' values. If transaction costs or firm specific human capital prevent the firm and CEO from recontracting to the CEO's market wage, then the value of the firm will depend on the continued employment of the CEO. Assuming perfect capital markets, abnormal returns surrounding the sudden termination of the manager/firm relationship will reflect these quasi rents. Applying Lazear's (1986) model of raids in the managerial labor market, we argue that only high ability executives are bid away by other firms. By comparing the abnormal returns associated with loss of an executive to another firm with those associated with loss of an executive by sudden death, we attempt to derive a measure of the relative contributions to the value of the firm (net of wages) of high vs. average ability managers. We find positive abnormal returns in response to sudden executive death and negative abnormal returns in response to top executives being bid away by another firm. In addition, we find a negative event response when an executive is bid away by a larger firm and a positive event response when managers leave for smaller firms. This finding is consistent with Rosen's (1982) hypothesis of a complementarity between firm size and managerial ability.

Note: This is a description of the paper, and not the actual abstract.

JEL Classification: G30, J31, J41

Accepted Paper Series


Not Available For Download

Date posted: January 14, 1999  

Suggested Citation

Hayes, Rachel M. and Schaefer, Scott, How Much Are Differences in Managerial Ability Worth?. Journal of Accounting and Economics, Vol. 27, Iss. 2, April 1999. Available at SSRN: http://ssrn.com/abstract=143148

Contact Information

Rachel M. Hayes
University of Utah - David Eccles School of Business ( email )
1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States
Scott Schaefer (Contact Author)
University of Utah - Department of Finance ( email )
David Eccles School of Business
Salt Lake City, UT 84112
United States
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